Thursday, February 19, 2009

Why Blame the Govt.?

Suhel Seth- The English Media's favourite round table boy. An individual who has an opinion on everything under the sun so what if you don't understand them. Have an opinion and a strong one at that.

Post the beginning of the economic crisis, most have blamed the Govt. for reacting very late. People have opined about how complacent the current administration has been in averting the present crisis and how late they were in taking steps to curtail the ramifications.

I am not a fan of this present Govt. , only of few individuals just like any other administrations in the past. But wonder what the govt. could do in order to avert this crisis. I do think govts. are complacent but to me the criticism otherwise is placed i.e. about the role of the govt.

Few Arguments made by those who criticise the govt.

1. They brought down interest rates very late: In Mid 2005-06 when credit was growing at 23% Kamath and his tribe wanted it head south as the India growth story would be over cause of dearer funding. RBI was criticised throughout 2007 when interest rates were rising. Various banks had criticised RBI on the grounds that several new and cheaper channels of funding emerged(PE,VC Equities etc.) especially to Realty. In hindsight we see wisdom of having been conservative with our credit. To me the central bank is the best judge of when interest rates need to be brought down.

Whether or not Interest rates were brought down late is very subjective cause the important point is of them being effective. Obviously interest rates need to be brought down slowly and in a cordial manner.

Interest rates are down today. Has the demand situation reversed? A resounding no. The demand destruction post the excess supply was bound to happen and interest rates rather the reduction of it wouldn't have helped one bit. In fact in hindsight seem prudent. If banks had relatively cheaper credit available it would have entered a system that was still running at high prices. In layman's terms- Funding Jag purchase by the Tata's at a high price would have created another cycle of problems of credit. The need to fund the deal obviously is no reason for credit to become cheaper.

2. Policy Changes were inadequate: What policy could have reversed the dismal situation that textiles and gems and jewellery segment were in as the problem with these sectors was with the huge demand fall in target markets. What impact would zero export duty have when there in no importer ready to buy abroad. The fact is the policy would have been ineffective to curb demand fall abroad.

When banks are collapsing abroad what policy would have helped the IT sector where BFSI account for 40% of India's IT revenues.

3. Oil prices were brought down very late: Again don't think govt is at fault here. There were two Strong reasons- One is of the previous losses that had to be recovered and to get some cash in the balance sheet of these companies so that they don't cry "Oil Bonds Please" later. And mind you Oil bonds contribute to inflation again instead of bring it down. Second is of the depreciating currency. If one denies the impact of the currency then one is undermining it's role. Inflation control that was achieved during the appreciating rupee would have the opposite one during a cheaper rupee.

4. Tax rates should have been cut: Look dude to pay taxes you need income, you need profits. What taxes are you gonna pay when both don't exist? Yup the previous argument seems valid. But the fact is that if one wanted economic activity it is imperative that one spends. It's important that money flow improves which yes could happen by reducing tax rates and leaving more money in the hands of the consumer. Probably the govt. is at fault here. But given the levels of fiscal deficit, the farm loan waiver, the 6th pay commission I guess I would have a be a real tough nut to implement this measure.

In a nutshell, even if the govt wanted to and was not complacent as said to be in some quarters they role would have been insignificant given the fact that the excess supply and over heated demand had to correct severely.

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